Rightacres v Customs & Excise [2005] UKVAT V19140 (29 June 2005)

19140
Value added tax – input tax – partial exemption – whether share dealing incidental to main business of appellant company - no

LONDON TRIBUNAL CENTRE

	RIGHTACRES LTD	Appellant

	- and -

                                  HER MAJESTY’S REVENUE AND CUSTOMS            Respondents

				Tribunal:	  Dr David Williams (Chairman)
						  Angela West FCA (Member)

Sitting in public in Cardiff on 21 April 2005 

The Appellant did not appear and was not represented

Mr Owain Thomas of counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	As the Appellant was neither present nor represented at the hearing, Mr Thomas applied for the case to proceed under Rule 26 of the Value Added Tax Tribunal Rules. The tribunal noted from the papers that the previous representatives of the Appellant had been replaced by new representatives in February 2005, and that the papers giving notice of the hearing on 20 April 2005, which had been received by the previous representatives, had been passed to the new representatives. The clerk had contacted the new representatives and the appellants on the instructions of the chairman. The clerk had been informed that the individual representing the Appellant was not available but that further enquiries would be made. No other communication had been received by the tribunal or the Cardiff hearing centre from the Appellant or representative, and Mr Thomas confirmed that he was instructed that the Respondents had had no relevant communications. The tribunal, noting that it had been acknowledged for the Appellant that proper notice had been received, accepted Mr Thomas’ application and heard the case in full. It agreed to accept that application rather than strike the appeal out for non-compliance. It noted, in so doing, that the Appellant had a right to ask for its decision to be set aside as the hearing took place in its absence. 

2.	The Respondents provided the tribunal with a full set of relevant papers, including the Appellant’s annual report and financial statements for 1999 and 2000. Elin Thomas, an Officer of Revenue and Customs and the officer who raised the assessment under appeal, gave evidence on oath. Mr Thomas also took the tribunal to the papers relating to the appeal and, at the request of the chairman, raised issues that might assist the Appellant as well as putting the Respondents’ case. 

3.	The central issue under appeal is whether the Appellant shows any reason why the assessment made for the Respondents on 18 July 200 in the sum of £17,262 plus interest of £1630.82 should be set aside or revised. That assessment was made on the basis that the Appellant had not properly applied the partial exemption rules in its returns.

4.	Mr Thomas confirmed to the tribunal that there was no issue of quantum outstanding between the parties. Further, a special method for dealing with partial exemption had been agreed between the parties with effect from 10 July 2002. However, that agreement was not retrospective. The issue for the tribunal was whether the Appellant was or was not wrong in failing to apply the standard method for calculating value added tax in respect of partial exemption before the special method was agreed. 

5.	Behind that issue was a single question requiring decision, namely whether the share trading conducted by the Appellant in the year ended 31 August 2000 was or was not “incidental” to the main activities of the Appellant within the meaning of 101(3)(b) of the Value Added Tax Regulations 1995.

6.	Regulation 103(3) provides, so far as relevant:

In calculating the proportion under paragraph (2)(d) above, there shall be excluded –
	
	…

(b) any sum receivable by the taxable person in respect of any of the following descriptions of supplies made by him, where such supplies are incidental to one or more of his business activities …

It is common ground that the supplies in question are within this rule if they are “incidental to one or more of his business activities”.

7.	Mr Thomas contended that whether or not a supply was incidental to the main business of a taxable person for the purposes of partial exemption was essentially a matter of fact, provided that both the supply said to be incidental and the main business were supplies within the scope of value added tax. It was not disputed for these purposes that any dividends received by the Appellant were supplies otherwise than for consideration and not within the scope of the tax. He drew attention to the reliance of the tribunal in C H Beazer (Holdings) Plc v Commissioners of Customs and Excise (1987) VAT Decision 2447, on the “ordinary, everyday meaning” of incidental. 

8.	He also submitted that the tribunal, when applying regulation 101, should follow the decision of the European Court of Justice in Empresa de Desenvolvimento Mineiro SGPS SA  (EDM) v Fazenda Public, Case C-77/01, of 29 April 2004. The case concerned the term “incidental” in Article 19 of the European Council Sixth VAT Directive (Council Directive 77/388/EEC). The tribunal accepted his argument that this was directly relevant to the consideration of the same term in Regulation 101 as both concerned the issue of partial exemption, although Regulation 101 applied not because of  Article 19 but because of a special rule operating by derogation from that Article. In EDM, the Court ruled that:
	
“activities that consist in the simple sale of shares and other negotiable securities … do not constitute economic activities within the meaning of Article 4(2) of the Sixth Directive and, therefore, they do not come within the scope of that directive.” (Paragraph 62).

9.	 It follows that if the only activities involving shares are receipts of dividends and sales, then the activities are outside the scope of the tax. That being so, they are not relevant to a partial exemption calculation. The converse is that to be relevant, the activities involving the shares must be more than merely “simple sales”. This is clearly relevant to the assessment of whether the share activities of the Appellant are “incidental” to its other activities. 

10.	The Court in EDM also commented directly on the meaning of “incidental” in Article 19. The Court identified the purpose of the rule as follows:

“The purpose of excluding certain incidental transactions from the denominator of the fraction used to calculate the deductible proportion, in accordance with the second sentence of Article 19(2),is to neutralise the negative effects for the taxable person of that consequence inherent in the said calculation in order to avoid such transactions distorting that calculation and to thus meet the objectivity of neutrality guaranteed by the common system of VAT.” (Paragraph 75).

The Court concluded:

“It follows from the foregoing that the annual granting of loans by a holding company to companies in which it has a shareholding and placements in bank deposits in securities such as Treasury notes or certificates of deposit, in so far as these transactions involve only very limited use of assets or services subject to VAT, are to be regarded as incidental transactions within the meaning of the second sentence of Article 19(2) of the Sixth Directive. In that regard, although the scale of the income generated by financial transactions within the scope of the Sixth Directive may be an indication that those transactions should not be regarded as incidental within the meaning of that provision, the fact that income greater than that produced by the activity stated by the undertaking concerned to be its main activity is generated by such transactions does not suffice to preclude their classification as “incidental transactions.”

11.	Mr Thomas drew our attention also to the opinion of Advocate General Leger in which he had taken a firmer view about the relevance of the size of transactions to that taken by the Court. 

12.	In the tribunal’s view those considerations are directly relevant to its own consideration of the facts in this case. It considers that it should take both a qualitative and quantitative view of the relationship between the property activities and the share activities. Was there anything, as a matter of law, stopping one being incidental to the other? If not, was the one as a matter of fact incidental to the other?

The facts

13.	According to the Directors’ Report of the Appellant produced for the year ending in 1999, “the principal activity of the company is that of property development trading and investment.” In that year, the company’s turnover was recorded in the profit and loss account as just over £1 million. Its balance sheet showed “stocks” under current assets valued at £6.69 million and current asset investments of some £760,000. 

14.	 According to the Directors’ Report of the Appellant produced for the year ending in 2000, “the principal activity of the company is that of property development and property and share trading.” In that year, the company’s turnover was recorded in the profit and loss account as approaching £32 million. The tribunal notes that the 1999 turnover was restated as approaching £31 million. The balance sheet for 2000 showed “stocks” under current assets valued at £10 million, with the 1999 figure restated as £7.4 million. No current asset investments are noted in the accounts. The tribunal did not see any explanation for the restatements in the 2000 accounts, although of course there may be full explanations. The Commissioners also produced in evidence the  business questionnaire sent from the Appellants to the Commissioners in October 2001, confirming that the business of  the Appellant was both property development and rental and also share dealing.  

15.	Whatever the explanations, the Commissioners contend that these contrasting statements and figures suggest that as a matter of fact the change that took place between these years was not a mere incident of the business of the Appellant. It was a more significant shift of activity than that, and share dealing had become one of the main functions of the business.  

16.	In its written views in the papers before the tribunal, those representing the Appellant at the time argued that the supplies involved in handling the share transactions were mere incidentals. This was derived from the relatively little time and inputs expended on the share transactions. The papers contain full details of the individual transactions involved in handling the shares and the nature of the shares involved.

17.	Separately from this, the tribunal established to its satisfaction that the shares involved in the transactions were not shares in subsidiary or related companies to the Appellant but were transactions in quoted market securities. So there was no issue in the case about non-economic activities in the involvement of the Appellant in handling the shares. There was nothing as a matter of law excluding them from the partial exemption calculation and the share transactions were therefore relevant to the Appellant’s partial exemption calculations and returns. 

18.	In her oral evidence, Elin Thomas confirmed that she had noted the extent of the activity in share trading on her audit visit to the Appellant in January 2002. After asking for further information after the visit, she had formed the view that the share dealing was a part of the business that should have been included in the Appellant’s returns and accounts. She had issued the assessment against the Appellant on that basis.

The Commissioners’ decision not to backdate the special method

19.	When the Commissioners granted the Appellant’s application for a special method to deal with its situation, they refused the application to have that special method applied retrospectively. That was a decision within the discretion of the Commissioners and on which they have published a clear policy, as noted in the papers. As Mr Thomas pointed out, the Appellant had not raised this refusal to backdate as an express ground of appeal. He argued, nonetheless, that had it been raised, it would not have been within the jurisdiction of the tribunal to do more than consider the reasonableness of the decision. There was no full appeal on such a question. The tribunal indicated that it agreed that the matter had not been put in issue for the Appellant and that it could of its own volition see no argument in the papers raising an issue within its jurisdiction. It therefore did not call on Mr Thomas to argue the matter further.    

The tribunal’s decision 	

20.	The tribunal finds as fact that the share activities of the appellant company reflected the changed statement in the Directors’ Report. The company diversified into handling the shares as a second activity and not as an incidental activity tied in with the property development and rental. This is clear not only from the changes in the annual reports but also the scale of the share activities and the lack of any common features between the property activities and the share activities.

21.	It followed that as a matter of fact the share activities were not incidental to the other activities of the Appellant during the period. The appeal must therefore be dismissed.

Costs

22.	Mr Thomas took the unusual step of asking for costs for the Commissioners. He did so for several reasons. Neither the Appellant nor any representative had attended the hearing, nor had the Appellant or any representative properly indicated to the tribunal or to the Commissioners why that was so. He submitted that there was no indication available to the Commissioners of any good reason for that non-attendance and non-reply. And according to the record the Appellant had had professional representation throughout its conduct of the appeal, so that failure was in his submission unreasonable and accordingly should be the subject of an order for costs.

23.	The tribunal indicated at the hearing that it accepted that submission. It noted that the Appellant had a power to ask for the hearing to be set aside if it could show good reason resulting from its non-attendance. If that led to the Commissioners being asked to attend a second hearing then, in the tribunal’s view, it should receive its costs for the conduct of the appeal so far. If it did not, then that also suggested that the failure to indicate a good reason before the hearing was unreasonable. On either account, there was a sound basis for costs. The tribunal had invited Mr Thomas to consider any available arguments to assist the Appellant’s case, and itself had questioned the witness and tested the evidence to see if there was an arguable case for the Appellant’s approach to the appeal. It was unable to identify one on the submissions made to the Commissioners and the tribunal. An award of costs was therefore fully appropriate.

24.	The tribunal therefore awards costs to be determined in the usual way.    

DAVID WILLIAMS
CHAIRMAN

RELEASED:

LON/2003/0125